Hanke Spanks Bernake-3

"In October the Producer Price Index sank 2.8%, it's biggest one-month drop since the Labor Department began measuring it in 1947. At the same time, the Consumer Price Index fell by 1%. It's no surprise that everyone in the U.S. is talking about deflation. Indeed, the bond market is pricing in deflation. The fact that the yield on five-year Treasurys with no inflation adjustment is 2% while that on five-year Treasury inflation-protected securities is 2.4% implies that the bond market expects annual average inflation to be a negative 0.4%. ... However, the Fed has put the money pump into overdrive, and it is hard to see any way in which deflation could be a headline-grabber for many more months, let alone five years. U.S. Treasury-indexed securities remain a buy. ... In the absence of good official numbers, I've developed my own hyperinflation index for Zimbabwe. I derive it from market-based price data starting in January 2007. The index tells us that Zimbabwe's annual inflation rate peaked at 80 billion percent a month. That means about 6.5 quidecillion novemdecillion percent a year--or 65 followed by 107 zeros. To get a handle on it, realize that it's equivalent to inflation of 98% a day. ... No hyperinflation has ever been recorded when money was based on or convertible into a commodity. The first hyperinflation happened during the French Revolution. There were 28 other hyperinflatons before Zimbabwe's, all in the 20th century", my emphasis, Steve Hanke (SH) at Forbes, 22 Dercember 2008.

I'm not "everybody"; I don't talk of deflation. Bonds are a bigger bubble than real estate was in 2006. I wouldn't touch TIPS, disagreeing with SH. SH must think the US has "good official numbers". I'm sure they're good. For Uncle Sam! I think all of Unc's statistical measures have a political component. 28 of 29 hyperinflations occured in the 20th century. I wonder why.

Chutzpah Unlimited

"Intense lobbying by banks and bankruptcy experts softened a key provision in the auto-bailout bill that would require government loans be repaid ahead of banks and other lenders. But the current language leaves unlcear just who would collect first in the event of a bankruptcy filing--taxpayers or existing creditors. ... The banks prime concern centered around a plan to make the U.S. government's $14 billion in rescue loans senior to other loans. They argued that this clause violated the Fifth Amendment of the U.S. Constitution, which prohibits the taking of private property without 'just compensation'. ... Historically, the only way a secured lender can be forced to take a backseat to another lender is in bankruptcy court, where a judge hears from the secured lenders and determines if those creditors are protected with additional collateral or other measures. ... 'It really sounds like a clear violation of the taking clause in the Constitutuion, to put the government ahead of all the other lenders. To go this route is a treacherous path riddled with all sorts of constitutional issues,' said Don Workman, head of the restructuring practice at the law firm of Baker Hostetler [BH]. ... It is still unclear what the practical effects of this language may be. Potentially, that could place the government behind the banks but ahead of the bondholders in repayment, say turnaround experts. Lenders said if left unresolved, the language could make banks and others even less willing to lend to troubled companies, for fear that the government could intervene in more situations. But the change may also anger policy makers, who have demanded the government and taxpayers be paid back first", my emphasis, Jeffrey McCracken & Elizabeth Williamson at the WSJ, 11 December 2008.

"GMAC LLC is racing to raise $1.25 billion in fresh capital necessary for the [Fed] to begin backstopping the company's finances. ... As a federally chartered bank, GMAC can have its debt temporarily guaranteed by the [FDIC]. GMAC could also access the Fed's discount window for inexpensive, short-term emergency loans at a time when its borrowing costs have soared due to battered credit ratings. ... GMAC's shift to a bank holding company would greatly benefit GM", Aparajita Saha-Bubna at the WSJ, 15 December 2008.

"The key to any magic trick is to focus the audience's attention away from where the action is actually taking place. That is what Congress did in the failed auto bailout bill. Language in the proposed legislation seems to uphold the rights of existing car-company creditors while also protecting any taxpayer funds used to prop up Detroit. In reality, the bill raised a chilling prospect for debt investors: that in extreme situations the government could upend the traditional pecking order of the bankruptcy process. ... Creditors' rights became an issue in the proposed automobile bailout because the government planned to put its money first in line for repayment in the event of bankruptcy. That seems to be a no-brainer for taxpayers", my emphasis, David Reilly (DR) at the WSJ, 15 December 2008.

Is Uncle Sam considering an auto maker or another banker bailout? BH's Workman should be called to Congress and told on television tell your clients, "if you want federal money, subordinate. Alternatively, we will let the auto makers go bankrupt. Which would your clients prefer?". Congress should call Vikram Pandit (VP) and ask him, if he thinks Citigroup should treat any federal auto bailout money as if it's debtor in possession financing. Then call in Kenneth Lewis (KL) and ask him what is the B of A's position. What will VP and KL say on television in front of millions as thousands of UAW members and other peasants with pitchforks surround the Capitol? That any financial institution would raise this issue is amazing. Until Unc puts money in, he holds the cards. For that matter, any bank which received federal bailout money should be prohibited from lobbying. The bank doesn't like it, give the money back. I don't see banks arguing the Fed's existence violates US dollar holders rights and for the Supremes to reverse the 1930s' "gold clause" cases. "For fear the government could intervene"? This is the banks' Alice In Wonderland world. Michael Savage, radio talk show host, speculated that what's really driving the auto bailout bill is the Bush administration's desire to protect Cerberus Capital which has positions in Chrysler and GMAC and is well-connected politically. Maybe.

Temporarily?

I agree DR, this is a "no-brainer". Either this is an auto bailout bill, or another bank bailout bill.

National (In)Security Team

"President-elect Barack Obama appointed his national security team December 1. ... Obama launched his White House campaign on the leftist antiwar plank of an immediate withdrawal of all U.S. forces from Iraq. ... 'We're going to have to bring the full force of our power, not only military but also diplomatic, economic, and political, to deal with threats, not only to keep America safe but also to ensure that peace and prosperity will exist around the world,' Obama said, noting that his security team nominees, 'share my pragmatics about the use of power and my sense of purpose about America's role as a leader in the world.' ... Susan Rice ... has argued that it was a mistake not to have intervened in Rwanda in 1994 when hundreds of thousands of Rwanda's Tutsis were massacred by Hutus in a tribal war that continues to play out today in the Congo. ... But there may be a downside to these appointments that runs beyond the current conflicts which Obama realizes cannot be lost on his watch if his presidency is to be considered a success by the American people. ... However, Gates has suggested trade-offs may be needed in long term programs to fund the current counter-insurgency campaigns. He has considered cancellation of expensive projects such as the Army's high-tech future Combat Systems and the Air Force's F-22 air superiority fighter. And he has shown no interest in expanding shipbuilding to maintain a 300-ship Navy which the admirals believe is necessary to sustain America's global reach. In a May 13 speech, Gates said, 'any major weapons program, in order to remain viable, will have to show some utility and relevance to ... irregular campaigns.' Such one-dimensional thinking, and at the low end of the conflict spectrum, would endanger America's strategic superiority against the most dangerous threats--rival major powers with the resources to expand their international influence. The U.S. and its allies must, of course, win the current campaigns against insurgency and terrorism. But it must be remembered that such irregular warfare is the tactic of the weak, and those whose capabilities are indequate to win control of people and territory. ... [A] National Intelligence Council ... report warned that the greatest dangers are coming from a resurgent Russia and a rising China, not terrorist groups. ... Yet, the U.S. military must be prepared to fight major wars against other nation-states, or their well-armed proxies. Air supremacy, command of the sea, and the ability to project heavy ground forces are necessary capabilities. Larger, deeper force levels are required for all services, to be issued with the best arms and equipment American industry can devise. If the United States fails at the high-end of conflict, it cannot succeed anywhere else in the long run", my emphasis, William Hawkins (WH), 5 December 2008 at http://frontpagemag.com/Articles/Read.aspx?GUID=E7EF9C8F-8520-445D-B335-6FCEABE91F84.

"If you've been laboring under the impression that President Bush is in favor of expanding and strengthening the American military, I've got some news for you. The man he installed as the replacement for Donald Rumsfeld as Secretary of Defense, former career CIA man Robert Gates, is not exactly headed in that direction. In fact, there's no question that he's quite adamant about continuing the current Bush Administration policy of not modernizing our conventional warfare capacity--that is, the Cold War concept of combat--because we're going to concentrate on 'irregular' warfare. ... Is Gates as Defense Secretary the greatest thing since sliced bread? Or is his continuation in that position a betrayal by Obama that is a grevious breach of his promises to the left wing of the Democrats? Or is Robert Gates taking us to the point of no return when it comes to America's conventional warfare capacity? Perhaps we should ask the Russians and the Chinese?", Dennis Sevakis (DS), 14 December 2008 at http://www.americanthinker.com/blog/2008/12/whither_americas_defense_polic.html.

"Iraq, Afghanistan and Guantanamo get more press, but among the most urgent national secuity challenges facing President-elect Obama is what to do about America's aging nuclear stockpiles. No less an authority than Secretary of Defense Robert Gates calls the situation 'bleak' and is urging immediate modernization. ... [Obama's] wooly words have given boost to the world disarmament movement, including last week's launch of Global Zero, the effort by Richard Branson and Queen Noor to eliminate nuclear weapons in 25 years. Naturally, they want to start with cuts in the U.S. arsenal", Editorial at the WSJ, 15 December 2008.

Adolf Hitler said during the Yugoslavia campaign that guerrilla warfare was the refuge of the weak. Gates may be our worst SecDef since Robert MacNamara. He "thinks" all major weapons programs should "show some utility and relevance to ... irregular campaigns". Is Gates an idiot, or worse? Must a hammer show "some utility ... to turning nuts"? Gates, get out. Why "must we win the current campaigns"? I see no strategic significance to the US of the Iraq or Afghanistan "wars". Absent strategic superiority, the rest of our military forces are useless. 300-ship Navy? I remember when the US aimed at a 600-ship Navy, see my 22 November 2007 post: http://skepticaltexascpa.blogspot.com/2007/11/us-navy-rip-3.html.

I agree with DS. Suprisingly, I think if we asked Czar Putin he would tell us. Why? I think the Czar prefers a strong US to a strong China. China borders Russia. We don't.

What a piece of work Queen Noor (QN) is. Who is QN? QN, born in 1951 as Lisa Halaby, had a silver spoon in her mouth. She went to Princeton. That happens if your father is CEO of Pan American Airways. She marries the King of Jordan. So? Now she wants the US to disarm. Why? I presume since she has not been assassinated, she is part of the world-wide Jihad. QN, thank you very much. Go to hell. Among QN's more charming traits are: apparent historical ignorance and virulent anti-Semitism. Did you know Jordan makes it a felony to criticize the Prophet (PBUH)? Has QN spoken out against this? Does QN believe in the First Amendment, or does she want to avoid following Marie Antoinette to the guillotine?

Are Insurers Next?-4

"A group working for state insurance regulators has greenlighted several proposals submitted by the life-insurance industry in recent weeks aimed at lowering insurers' capital and reserve requirements. Actuaries and other technical experts at the National Association of Insurance Commissioners gave the go-ahead to several of nine proposals. The news will be welcomed by investors, who battered shares of life insurers in recent weeks on concerns insurers would have to raise capital on unfavorable terms to show regulators they can made good on retirement-income products that carry minimum-return guarantees. ... The American Council of Life Insurers' proposals touch on reserves and capital requirements for life insurance and variable annuities, as well as investment and accounting practices. Insurers have said that many of the proposals involve the elimination of reserves. The ACLI estimates that the changes would free up $22 billion to $28 billion industrywide", my emphasis, Lislie Scism (LS) at the WSJ, 8 December 2008.

"Thanks to an effort by New York regulators to give life insurers more flexibility in calculating their reserves, MetLife Inc. said earlier this month it expects to reduce by about $1.8 billion, or more than 30%, the amount it must post to show it can deliver on guarantees in mimimum-return variable annuities. ... Reserve levels and capital cushions of publicly-traded variable-annuity sellers have been under a microscope in recent months as analysts and stock investors have feared that regulatory requiremnts would prompt a round of capital raising on punishing terms. ... Under the system of state insurance regulation, insurance departments rely heavily on the NAIC's expertise in solvency matters to guide them in setting rules. But they aren't bound by the NAIC's moves", my emphasis, LS at the WSJ, 19 December 2008.

"With their guaranteed payouts and protection against market downturns, annuities have long enjoyed a reputation as a refuge in times of turmoil. But after AIG required government assistance (three times so far this year) to stay afloat and several life insurers saw their stock prices sink 70% or more over the course of two months, annuity owners might understandably be nervous. After all, you invest in an annuity because you want your money to be absolutely safe. So how secure is it? ... Although life insurers are certainly struggling, to date not one major company has bitten the dust as a result of the crisis, which is more than you can say about banks and investment firms", Fortune, 22 December 2008.

How does LS know what made insurers' shares fall? Isn't their investment porfolios' fall a more likely reason? That insurers get "regulatory forbearance" indicates they are in bad shape. LS writes of "unfavorable terms". To whom?

More flexibility? Or book cooking? Punishing terms? Why does LS favor insurers over prospective new investors? Does anyone at the WSJ edit LS's articles to keep her opinions off the news pages? Apparently not. Last year MetLife paid Deloitte & Touche (D&T) $47 million. D&T's 2008 opinion should be interesting. MetLife's Audit Committee (AC), whatever that is has members: Sylvia Burwell, a Rhodes Scholar who once worked for Robert Rubin; Burton Dole, retired chairman of Dole/Neal an energy mangement firm, who has a Stanford MBA and was Chairman of the Kansas City Fed; Cheryl Grise, an attorney; James Houghton, Harvard MBA; John Keane, Director of Keane Advisors, a private equity investment firm, has a Fordham bachelor's degree in accounting; Hugh Price, a Yale Law Degreed attorney; Kenton Sicchitano, retired PriceWaterhouseCoopers partner has a Harvard MBA and William Steere, retired as Chairman of Pfizer. What does the AC do? If MetLife has a reserve problem, why didn't they find it? Will they excoriate D&T for doing a bad audit? Will Dudley Do-right save Nell Fenwick? Imagine, Metlife's AC has a retired Big 87654 partner. Page 28 of MetLife's 18 March 2008 Proxy Statement says, "The [AC], on behalf of the Board, is responsible for overseeing management's conduct of MetLife's financial reporting and internal control processes". Really? Will Metlife report the $1.8 billion as a change in accounting principle or estimate, see FASB 154. What will MetLife claim is the rationale for this change? What happened in the last nine months to permit it?

So far, but the Fed and Treasury have no compunctions about taking insurers' assets to protect investment firms. Witness AIG.

Steffy on Swaps

"Let's say you're driving down the road and three wheels fly off your car. How do you get rolling again? If you're Treasury Secretary Henry Paulson, you take a knife and slash the one remaining tire. ... The ensuing eight months have refuted the report's thesis of streamlined federal oversight. At every turn, state regulators have been the only friend for consumers and investors. It was the states, as my colleague R.G. Ratliffe norted earlier this week, that forced banks to make good on auction-rate bonds they sold to investors, often under false pretenses, when the market collapsed in February. It was the states that backed class-action lawsuits against subprime mortgage peddlers, such as Ameriquest and Countrywide, forcing the companies that bought them, Citigroup and Bank of America, respectively, to modify loans for beleaguered borrowers. ... When it became clear that the murky market for credit default swaps needed transparency, it was the state insurance commissioner from New York who stepped in, declaring what Congress had danced around for years: the swaps are insurance and need to be regulated as such. ... The SEC itself has seemed largely oblivious to its role of investor protection, a finding underscored in an inspector general's report on the agency released late on the Friday after Thanksgiving. Damning in its findings, the report portrays an agency rife with potential conflicts, including improper ovesight to prevent SEC employees from trading on insider information. In other words, it's the SEC itself that's ripe for reform. ... In fact, his plan is nothing more than a shill for Wall Street, which would have to love to see state regulation weakened, leaving the SEC and the self-regulatory arms of the stock exchanges as the primary enforcers", my emphasis, Lorey Steffy at the Houston Chronicle, 10 December 2008, link: http://www.chron.com/disp/story.mpl/business/steffy/6156405.html.

I note the PCAOB is an arm of the SEC. I think it's worse than the SEC, focusing on insignificant cases and ignoring larger issues. I've posted on the SEC and PCAOB many times. As they currently operate, they're jokes.

The Coming Depression

"In spite of Friday's alarming rise of 533,000 in unemployment, when you look at the near-term future, there still seems little chance that the current unpleasantness will turn into a rerun of the Great Depression [GD], or anything like it. ... However, in the long term, things are not so rosy; over the next 15 years, Americans and Europeans may suffer a worse fall in their living standards than during the [GD], albeit played out agonizingly slowly. ... In terms of living standards, real per capita personal consumption expenditures did not recover to their 1929 level until 1941, giving American consumers 12 years of living standards lower than they had become used to. ... In the long run, a major economic effect of economic globalization is to reduce the income gap between rich and poor countries, by bringing the latter fully into the nexus of the global economy. ... There is one snag, at least for rich countries such as the [US], Western Europe and Japan. If the world becomes more equal more quickly than it become richer, then living standards in rich countries must decline. If the world were suddenly to achieve equal income levels between countries, without a significant increase in output, U.S. living standards would fall by over three quarters. ... A second factor intensifying the decline in U.S. living standards is the appallingly low U.S. savings rate and the reduction in the U.S. capital pool that has resulted from over a decade of excessively low interest rates. ... The final factor depressing long-term living standards is the unwise policy response in the last few months to the credit crunch and the beginnings of global downturn. ... Contrary to popular and journalists' beliefs, these expenditures are not free; they must be borrowed. ... There are few policy responses that will do any good. Probably the most important is to raise the real return on risk-free savings as quickly as possible to around 5% to 6%, higher than the equilibrium rate, while eliminating the federal budget deficit. ... Before you dismiss this speculation as far-fetched, remember: everyone used to think house prices could not fall nationwide", Martin Hutchinson (MH), 9 December 2008 at http://www.prudentbear.com/index.php/commentary/bearslair?art_id=10160.

I don't dismiss MH's comments, I think his scenario is likely. See my related 4 July 2008 post on sovereign debt, http://skepticaltexascpa.blogspot.com/2008/07/sovereign-debt-risk.html.

IRS Overreaches

"But the Treasury's and IRS's notice troubled many tax experts, who saw it as a strike against a portion of the tax law known as Section 382 that was intended to prevent companies from buying other companies solely for their tax losses. 'There's real doubt that the Treasury and the IRS even have the authority to issue this notice,' [Robert] Willens said, 'What they did was nullify a portion of the statute that Congress had enacted. It's certainly the consensus of tax experts that [Treasury and the IRS] have overstepped their bounds'," my emphasis, Heidi Moore at the WSJ, 10 December 2008.

I agree with Willens, and see no basis for IRS suspending Section 382 to facilitate Wells Fargo's Wachovia purchase. John Calhoun, nullification proponent, must be dancing.

Jim Chanos Portrait

New York Magazine's Jim Chanos, hedge fund manager, portrait, is worth reading, 7 December 2008, link: http://nymag.com/news/business/52754

Ben Franklin-3

"Teresa Ghillarducci has always had more interesting--and controversial--things to say than your average retirement-policy wonk. ... Still, as she sat at the witness table on Oct. 7 at a hearing on the House Committee on Education and Labor, running through the litany of what's wrong with the 401(k) and other defined contribution retirement plans--they have high fees, for one--Ghilarducci didn't think she was courting controversy. 'I was saying things that seemed completely milquetoast,' she recalls. Ghillarducci did bring up a bold proposal to replace the 401(k) with a mandatory, government-run pension plan and suggested that Congress immediately allow retirees to swap 401(k)s battered by the stock market's collapse for monthly payouts from the government. But she had floated both ideas before, to little effect. This time, all hell broke loose. Her proposal caught the attention of talk-radio juggernaut Rush Limbaugh, and over the next few weeks Limbaugh hammered on Ghilarducci's idea as a Democratic plot to kill the 401(k). 'McCain has gotta tie Obama to these people,' he said on the air. ... Limbaugh has since dropped the subject, but it is far from dead. While Limbaugh took care to describe Ghillarducci's proposals correctly even as he castigated them, word has since spread, and warped, in some conservative circles of a purported Democratic plan to confiscate 401(k)s. ... Ghilarducci wants more--a government-run plan, financed in part by the end of the 401(k) tax deduction, that would guarantee a 3% return above inflation. Don't think that's a good deal? Fine", my emphasis, Justin Fox (JF) at Time, 15 December 2008.

This is terrible reporting. JF, you should be ashamed of yourself. Ghillarducci's plan, which keeps morphing, would have done precisely what the "conservative circles" accused it of, seizing one's 401(k) assets and replacing it with a promise to pay 3% a year in real terms. Who will decide: the inflation rate and when you can withdraw your money? Etc., etc.. Welcome to Argentina. I previously speculated Obama killed this plan. JF's statement attributed to Limbaugh seems to confirm this. See my previous posts on Uncle Sam's contemplated 401(k) grab:

http://skepticaltexascpa.blogspot.com/2008/11/ben-franklin-was-right.html.
http://skepticaltexascpa.blogspot.com/2008/11/ben-franklin-2.html.

Media and the Moslems

"Shortly atfter the London Tube bombings in 2005, a reader of Tim Blair, The Sydney Daily Telegraph's columnist wag, sent him a note-perfect parody of a typical newspaper headline: 'British Muslims Fear Repercussions Over Tomorrow's Train Bombing.' ... This time round--Mumbai--it was the Associated Press that filed a story about how Muslims 'found themselves on the defensive once again about bloodshed linked to their religion.' ... For the Wall Street Journal, Tom Gross produced a jaw-dropping round-up of Mumbai media coverage: The discovery that, for the first time in an Indian terrorist atrocity, Jews had been attacked, tortured and killed produced from the New York Times a serene befuddlememt: "it is not known if the Jewish center was strategically chosen or if it was an accidental hostage scene.' ... An 'accidental hostage scene' that one of the 'practitioners' just happened to stumble upon? 'I must be the luckiest jihadist in town. What are the odds?' ... The 'fairer' we are to the, ah inflamed militant practitioners, the unfairer we get to everyone else. ... And yet we take it for granted that Pakistani 'militants' in a long-running border dispute with India would take time out of their hectic schedule to kill Jews. In going to ever more baroque lengths to avoid saying 'Islamic' or 'Muslim' or 'terrorist', we have somehow managed to internalise the pathologies of these men. ... Last week, a Canadian critic reprimanded me for failing to understand that Muslims feel 'vulnerable'," Mark Steyn, 6 December 2008 at http://www.ocregister.com/articles/mumbai-muslims-time-2248410-jews-muslim.

Quoted without comment.